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FEDERAL TRADE COMMISSION v. VERITY INTERNATIONAL

April 1, 2002

FEDERAL TRADE COMMISSION, PLAINTIFF,
V.
VERITY INTERNATIONAL, LTD., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Lewis A. Kaplan, United States District Judge.

  MEMORANDUM OPINION

I.

ACL is an Australian company which, together with affiliates, has operated an Internet billing service for some time. Although there have been changes over time, the essence of the service has remained the same through the relevant period.

Defendants made available to their clients software that presented a computer user who accessed a client Internet web site*fn2 with a series of screens purportedly setting forth the terms and conditions of use of the site. If the user clicked a box stating "I agree," a dialer computer program supplied by defendants automatically downloaded to the user's computer, disconnected the user's modem from its ISP, and placed a call to a Madagascar telephone number assigned by Madagascar to ACL. ACL then "stopped" the call in the United Kingdom and reconnected it to the client web site, enabling the user to view the contents of the site. The subscriber of the line from which the call to the Madagascar number had been placed — who may or may not have been the person or entity that placed the call — then was identified through automatic number identification ("ANI") and billed for a purported international telephone call to Madagascar, although the charge in fact was that imposed for access to the contents of the site.*fn3 Defendants then divided the proceeds of the bills with the client web site operators in accordance with their contractual arrangements.

Beginning in January 1999, ACL had agreements with AT & T and, briefly, Sprint to handle this traffic and bill customers. In the summer of 2000, however, it chose to have the billing handled by its affiliate, Verity International, Ltd. ("Verity"). The switchover to Verity was a disaster,*fn4 and it led to the commencement of this action against, insofar as is relevant here, Verity and its principals, Robert Green and Marilyn Shein. The essence of the FTC's position is that (1) defendants' insistence that line subscribers are legally obligated to pay for access to these web sites where the line subscribers neither used them nor authorized such use, and (2) billing of calls "stopped" in the United Kingdom as calls to Madagascar both violated Section 5(a) of the Federal Trade Commission Act (the "FTC Act").*fn5

On January 4, 2001, the Court granted the Commission's motion for a preliminary injunction and an asset freeze.*fn6 The complaint, however, was ambiguous as to whether it sought relief in respect of the period prior to Verity's commencement of billing. Accordingly, relief was limited to the Verity period.

In March 2001, the FTC filed a second amended complaint, adding ACL as a defendant and expanded its claims to the period in which billing was done by AT & T and Sprint on behalf of ACL. The Commission then moved to extend the preliminary injunction to ACL, and defendants made related cross-motions. These motions have been resolved in all respects but one. The Court reserved the issue of the extension of the preliminary injunction to ACL*fn7 and conducted an evidentiary hearing on that subject on June 5, 2001.

II.

Defendants move for judgment on the pleadings on four grounds. First, they maintain that ACL is a common carrier and thus outside the FTC's jurisdiction.*fn8 Next, they contend that the filed rate doctrine precludes line subscribers from disputing the charges at issue because they were imposed in accordance with tariffs filed with the FCC. Third, defendants argue that the FCC has primary jurisdiction over this case or, at least, certain issues it presents. Finally, they assert that the complaint does not plead fraud with the particularity required by Rule 9 (b).

A. FTC Act Jurisdiction

The FTC Act explicitly excludes from its coverage "common carriers subject to the Acts to regulate commerce."*fn9 It defines the Communications Act of 1934 ("Communications Act") as such a statute.*fn10 Some time in 1999, ACL applied to the FCC for authority under Section 214 of the Communications Act*fn11 to become a facilities- or resale-based international common carrier. It appears that the application was granted and a tariff filed shortly thereafter.*fn12 ACL contends that its activities therefore are beyond the reach of the FTC.

ACL's argument presupposes that once the FCC licenses an entity as a common carrier, it is a common carrier for all purposes and thus entirely beyond the reach of the FTC. But that premise is fundamentally erroneous. An entity that is a common carrier may engage in a broad range of activities, some integral to its functions as a common carrier and some entirely extraneous to them. Even where Congress commits regulation of common carrier activities to a particular agency, it would make little sense to exempt a carrier s extraneous activities from laws of general application affecting the broad sweep of American business. In fact, ACL has conceded that the Communications Act, as amended, specifically states that "a telecommunications carrier shall be treated as a common carrier under this chapter only to the extent that it is engaged in providing telecommunications services."*fn13 Thus, the better considered authorities, as well as the FCC, agree that whether an entity is a common carrier for regulatory purposes depends on the particular activity at issue.*fn14 In other words, an entity may be a common carrier within the meaning of the Communications Act for some purposes and not for others.*fn15

To be sure, FTC v. Miller,*fn16 upon which ACL relies heavily, indicates otherwise. The Seventh Circuit there quashed FTC subpoenas served on a mobile home transporting company in an investigation of alleged unfair trade practices on the ground that the respondent operated under a certificate of convenience and necessity issued by the Interstate Commerce Commission and therefore was a common carrier exempt from FTC scrutiny under Section 5(a)(2) of the FTC Act.*fn17 Indeed, ACL goes on to point out that language in Miller to the effect that the Section 5(a)(2) exemption depends on the status of the party under scrutiny rather than its conduct was quoted by the Second Circuit in Official Airline Guides, Inc. v. FTC ("OAG")*fn18 with apparent approval. But neither Miller nor OAG is persuasive here.

As far as Miller is concerned, it is inconsistent with common sense proposition that the carrier exemption to the FTC Act should be construed no more broadly than its purpose — to avoid interfering with the regulation of carriers by agencies to which their regulation is committed. There was no inherent inconsistency between ICC regulation of, for example, entry into and rates charged by interstate trucking companies and FTC investigation of their allegedly unfair trade practices. Hence, this Court, agrees with other courts and the FCC, which hold that the term "common carrier . . . indicates not an entity but rather an activity as to which an entity is a common carrier."*fn19 Indeed, it must be borne in mind that Miller concerned the Interstate Commerce rather than the Communications Act. The Communications Act, as amended by the Telecommunications Act of 1996, specifically states that "a telecommunications carrier shall be treated as a common carrier under this chapter only to the extent that it is engaged in providing telecommunications services,"*fn20 implying that an entity can be treated as a common carrier for certain activities and not as a common carrier for non-telecommunications activities.

Nor is OAG of greater help to ACL. The Second Circuit there held that a company that published flight schedules was not exempt from the FTC Act under the exemption for air carriers equivalent to that for common carriers. Although some of the language suggests that status is more important than activity,*fn21 the case itself addresses whether an entity that is not a carrier falls into the exception when its activities are subject to regulation under the relevant act. In contrast, here the question is whether the activities — even those not regulated by the Communications Act — of an entity that is licensed as a carrier are beyond the scope of the FTC Act.*fn22 Moreover, underlying the reasoning in Official Airline Guides is a comparison of the "broad mandate given to the [Federal Trade] Commission to enforce section 5" with "the narrow exemption from the Commission s jurisdiction."*fn23 In these circumstances, these policies support a holding that ACL is not exempt.

This is precisely the conclusion advocated by the FCC, the agency charged with administration of the Communications Act, as amicus.*fn24 While not entitled to full Chevron deference, the FCC's informal views on this subject certainly are entitled to some deference.*fn25 It points out that FCC regulations define a communication common carrier as any person engaged in rendering communication service for hire to the public."*fn26 The regulation has been construed as establishing a two prong test determinative of common carrier status. First, the "primary sine qua non . . . is a quasi-public character, which arises out of the undertaking to carry for all people indifferently."*fn27 The second is "that the system be such that customers `transmit intelligence of their own design and choosing.'"*fn28

ACL has described its business as being comprised of three activities: (1) obtaining the rights to certain telephone numbers in foreign countries, (2) licensing the use of those numbers to companies that market billing software to web site operators, and (3) agreeing with long distance carriers to terminate calls from the carriers' home countries to the numbers in foreign countries in respect of which ACL has acquired rights.*fn29

These activities do not satisfy the test. As the FCC has said, "[t]he ultimate test is the nature of the offering to the public."*fn30 ACL does not claim to have held itself out to the public as an indifferent provider of telecommunications services. It was AT&T, and later Sprint, that provided long distance services to the public as common carriers. ACL did not set the rates, terms or conditions for those services. Nor did it physically do the billing.*fn31 Indeed, to whatever extent that ACL might have provided transmission services on a common carrier basis, it did so as a terminating carrier as agent for Telecom Malagasy. To that extent, it stood in the shoes of Telecom Malagasy and thus was a foreign terminating carrier rather than a common carrier subject to the FCC's jurisdiction.*fn32

ACL's contention that it is a reseller and therefore a common carrier also is without merit. As the FCC points out, resale is "an activity wherein one entity subscribes to the communications services and facilities of another entity and then reoffers communications service and facilities to the public (with or without `adding value') for profit."*fn33 The only thing ACL resold was the right to terminate calls to certain Madagascar numbers.*fn34 Even this it did not sell to the general public — only to a limited group of providers to whom ACL licensed the Madagascar numbers it licensed from Telecom Malagasy.

For all of the foregoing reasons, there is no basis for concluding that the ACL activities at issue in this case are common carrier activities within the meaning of the Communications Act.

B. Primary Jurisdiction

The doctrine of primary jurisdiction allows a federal court to stay or dismiss a case that involves "technical and intricate questions of fact and policy that Congress has assigned to a specific agency,"*fn35 here potentially the FCC. The doctrine "applies where a claim is originally cognizable in the courts, but enforcement of the claim requires, or is materially aided by, the [agency's] resolution of threshold issues."*fn36 This circuit has called the scope of the doctrine "relatively narrow,"*fn37 and courts typically have deferred to agencies ...


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